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Little the Fed can do, says legendary bear

When asked why interest rates are so low, Shilling (left) gave three reasons.

“I think we’re already in a global recession, particularly in the U.S., Europe and China,” he said. “Second, Treasuries are a safe haven and there are very few others. Third, there will be an increasing concern about deflation as economies of the world deteriorate.”

Deflation simply means supply exceeds demand, and “that’s the kind of world that we’re in,” he continued. “We already have deflation in financial assets, in tangible assets and in wages.”

When asked what the Federal Reserve should do in response, Shilling said there was very little they could do.

“The Fed will probably do something to show that they’re doing something, but I don’t think it will make much of a difference. What are they going to do, add another $500 billion to excess reserves?”

It will put a little more money in circulation, he added, and stocks may get “a pop for about 15 minutes,” but there will be less and less reaction as investors realize Fed action is having a diminished impact.

As for his thoughts on Dallas Fed President Richard Fisher’s recent comments about the risk of “overprescribing monetary Ritalin,” Shilling said, “Sure, there’s a risk of overprescribing, and Chairman [Ben] Bernanke has said that. Look, in about 15 minutes, they could get rid of massive reserves. They can sell Treasuries and rates go up and it cuts that off.”

But there’s a risk at that point of political pressure, he warned.

“If we get through all the deleveraging in, say, five or seven years, and the Fed says, ‘OK, we can get rid of all the excess reserves,’ the politicians will say, ‘Wait a minute, the economy is just now recovering and you want to go through another 1937 all over again?”